Venture Investors Driving Exits

Less than 1% of all startups receive venture funding. So, it is not unusual to hear entrepreneurs who fail to attract this type capital, decry the benefits of having venture capitals (VCs) at the table. Many of these entrepreneurs complain about rigid investment criteria, the constraints of working with demanding board directors, the distracting impact of investors who seek to sell the company or their interests within 5 years, and of course, the valuation sensitivity of venture capitalists generally.

However, there is an unquestionable correlation between the presence of VC investors in a company and their likelihood of being sold. In 2016, for example, venture-backed companies accounted for over 73% of IPOs and 35% of all exits.

Venture Capital/ Private Equity Investors De-Risk Hold Periods

Seeking exposure to private companies focusing on safety and security, some investors have chosen to pursue direct investment strategies, rather than investing in private equity or venture capital fund specialists who invest in the sector. But our analysis of the exit profiles reveals there are several reasons why investors may wish to couple their direct investing strategy with positions in institutional funds.

Unsurprisingly, private equity (PE) investors invest in much older, often cash flow positive, businesses in the sector. PE tend to invest on average 20 years after founding (median = 14 years), and generally deliver exits within 5-6 years of their initial investment.

Remarkably, venture has similar hold periods to PE: an average of 6-7 years after initial investment, despite VCs tending to invest earlier in the company’s lifecycle (average = 5 years after founding; median = 2 years). Not only do VCs tend to pick companies that naturally grow to exits faster, but we believe the VC’s work with management and their influence on strategy causes this acceleration.

In contrast, other investors (family offices, corporates, individuals) tend to invest in companies that take 15-17 years from founding to exit. There was insufficient available data to analyze these investors’ hold periods.

Venture Exits Require Creativity

Some key insights we note from the 5 largest venture-backed sales of the year:

Not all large exits are coming from Silicon Valley: in fact most are not, hailing from dispersed geographies in North America

Large exits in the sector are relatively capital efficient, with sale prices representing between 7 to 100x invested capital

With private equity aggressively pursuing the sector, it is essential that VCs have close relationships with active PE participants, and vice versa

We noted an active secondary share sales market in many of these companies’ securities prior to their exits, so prudent venture managers must diligently cultivate and liquidate interests to ensure investors get timely returns

Despite startup reservations and bad headlines, in 2016 VCs in the safety and security sector demonstrated their value. They were the overwhelming force behind exit activity in the sector, their hold periods were comparable to those of their PE cousins, and they continued to deliver capitally efficient exits with companies across North America. Consequently, it is unsurprising that non-venture investors are currently re-evaluating their independent investment strategies in this sector, and seeking strategic partnerships where they invest in or along-side experienced VCs.

About The Analysis: Our research leverages AlphaPrime’s proprietary data warehouse, Charlotte’s Web™, that tracks thousands of companies that protect people and assets. This particular analysis was conducted in February and March 2017. Charlotte’s Web™ is the result of hours of painstaking research: from our first analyst (and the data warehouse’s namesake) Charlotte Kwon, to Matteo Cuda, Emma Yunqi Li, Nathan Coen and Marc Bove who have contributed to its data reserves over the years. We remember and remain enormously thankful.

About AlphaPrime: In an increasingly complex and dangerous world, threats to people and assets are escalating in diversity, frequency and magnitude. The need and ability to anticipate and respond to these threats is essential and universal.AlphaPrime invests in companies that address this need, that protect people and assets. It’s not part of what we do, it’s everything we do.